This is a very frequently asked question. So, I thought to pen it down.

1. Capital gain: Whenever you invest in a Mutual Fund scheme, you purchase some ‘units’ of that scheme. For instance, if a Mutual Fund scheme’s unit price is Rs. 10 and you invest Rs. 1000 in it, you get 100 units. Now, tomorrow if the unit price rises to Rs. 15 per unit, you can sell off your units for Rs. 1500 (100 x 15) and earn a profit of Rs. 500. This type of profit i.e. buying at a lower price and selling at a higher price is called as capital gain. The concept is same for any other asset for that matter be it stocks or real estate.
2. Dividend gain: Most schemes also have a dividend option wherein they pay you back some amount time to time. You don’t sell anything but you get something like ‘interest’ on the money you have invested so far. For instance if you possess 100 units worth Rs. 10 in a Mutual Fund scheme, and the scheme declares a dividend of Rs. 1 per unit, you will receive Rs. 1 x 100 = Rs. 100 as return or profit. Schemes are under no obligation to pay dividend though.

Hope it helps.

Originally published on Quora

For better understanding of how mutual fund works, I’d recommend you to read this.